Corporate Law For Australian Securities And Investments

Business Structure and Liability

Describe about the Corporate Law for Australian Securities And Investments.

1. The business being run by Jack, Jill and Max is very successful and also growing with speed. It is essential that they adopt a definite business structure recognized by the Australian law (Australian Securities And Investments Commission, 2016). This would help to clearly define the rights and obligations of each of these individuals in relation to their business. This would help to prevent any disputes between them in future. There are several options available to them and most important business structure they can adopt is to form a partnership firm or register as a company under the Corporation Act. A partnership is an agreement among two or more people to carry out business activities where the partners become liable to pay for all the debts of the firm even out of their personal properties. In other words their liability is unlimited. A company is a separate legal entity which is formed to carry out a business and has its own assets and liabilities. It has an identity separate from its shareholders. This idea was strengthened by the court decision in cases like Salomon v Salomon & Co [1897] AC 22 (Salomon). Also in a case Peate v Federal Commissioner of Taxation (1964) 111 CLR 443 (HC, McTiernan, Kitto, Taylor, Windeyer and Owen JJ. (Law.unimelb.edu.au, 2016)   

In the case of a company the liability of the shareholders is limited to the amount of their share capital. The shareholders are not personally liable to the creditors of the company as stated by Latham CJ, in legal case The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42. (Law.unimelb.edu.au, 2016). A company is managed by its directors and other employees who are appointed by its shareholders who have a right to vote to manage its affairs by the majority vote. Even minority shareholders who do not have control are provided relief by courts in case of unjustified conduct by majority shareholders and the company might get winded up as becomes clear in two legal cases. Firstly in Hillam v Ample Source International(No 2) [2012] FCAFC 73 (Hillam). Secondly, in Ample Source International Ltd v Bonython Metals Group Pty Ltd; Re Bonython Metals Group Pty Ltd (No 6) [2011] FCA 1484 where the minority shareholders were oppressed. (Holdingredlich.com.au, 2016)

The business being run by Jack, Jill and Max should take the form of a private company (Companydirectors.com, 2016). These three individuals can become the shareholders and if they want, directors of their company (Companylawclub.co.uk, 2016). But the directors also become liable personally for acts of the company employees in cases of negligence by them in their duties as brought out in case  King v Milpurrurru33 in 1996 by judge Beazley J in  Federal Court. However directors cannot be held personally responsible for every act as officials of the company as becomes clear in judgement by  Lord Haldane in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705). (Epublications.bond.edu.au, 2016)

Formation of Private Company

The three individuals need not form a public company as this would dilute their control if outsiders are allowed to invest and have voting rights for management. Moreover their business is still not big and they do not need outside funding by issuing equity.  They would be entitled to a part of profits in the form of dividends. But although they would own shares of the company they would not become owners of the property of the company. Shareholders are not owners of the company’s property was proved in a case  KT & T Developments Pty Ltd v Tay (Unreported, Parker J, Supreme Court of Western Australia, 23 January 1995). Further, the business carried out by the company is not the private business of the shareholders as held in a case by Lord Sumner in Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 at 740 – 741 . (Law.unimelb.edu.au, 2016)

A company can be winded up at the initiative of its creditors if it has become insolvent, under s 459P (2) with the leave of the court. But in certain cases it is not allowed, Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd1.  (Allens.com.au, 2016).

The advantages of forming a company are many though they come with certain obligations imposed by law. So Jack, Jill and Max should form a private company.

2. As given in the case Child Toys Supreme Pty Ltd is a manufacturer and seller of children toys. A child has got seriously injured after using one of the toys made by the company because the toy contained harmful plastic chemicals. A court case can be filed against Child Toys Limited and the company can be prosecuted under the Australian legal system. The laws that would apply in this case would be Australian Consumer Law, Common Law Of Contract and the common law of negligence. 

Child Toys Ltd manufactures toys which are used by children. It is assumed that toys meant for playing by children should be safe for the purpose for which they are being used. The company selling the toys should have made sure that the toys manufactured by it had no harmful chemicals or other elements. But the company failed to do so. Thus the firm can be tried in a court of law under the common law of negligence. There can three types of negligence by a manufacturer and seller of a product. These can be negligence relating to design, manufacture and marketing of the product. In the given case Child Toys Ltd is guilty of both negligence in manufacturing and marketing.

The toy manufactures by Child Toys Ltd contained harmful chemical which could cause an injury to an individual. The company should not have used such chemical in the production of the toy. A similar situation is found in the case Donoghue V Stevenson [1932]. AC 562. Page 137 (Legal.thomsonreuters.com.au , 2016)

Advantages of Forming a Company

In the given case the child injured need not identify the individual employee in Child Toys Ltd due to whose negligence the harmful chemical was included in the manufacturing of the toy. The company as a whole has been negligent and would be held responsible for the negligence by the court. This situation is similar to a great extent to the case Grant V Australian Knitting Mills [1936] AC 85 at 101 (page 142) (Legal.thomsonreuters.com.au , 2016)  . In this case Child Toys Ltd cannot escape its liability for negligence on the grounds that no harm has been caused previously to anyone by its toys.  

There was no warning printed on the toys being sold by Child Toys Ltd that the toys contained harmful chemicals. Further, Betty the sales person also did not convey such information to the retail customers (Malbon, 2013). Thus Child Toys would be held responsible for negligence. Circumstances of such negligence can be found in another legal case Peterson v. Merke Sharpe & Dohme (Aust) Pty Ltd. (Faunce, 2010).

In the given case the child has suffered injury because of the presence of a harmful chemical in the toy. The injury did not happen because of mishandling of the product (toy) by the child or the retailer. The injured child was playing with the toy as any other child is expected to do. So in this case it is Child Toys Ltd which would be held responsible for negligence and not the child. This becomes clear in two legal cases. Firstly in Fletcher V Toppers Drinks [1981] 2 NSWLR 911. Secondly in Kilgannon V Sharpe Bros (1986) 4 NSW LR 600 (Legal.thomsonreuters.com.au , 2016).    

Child Toys Ltd can also be held liable for breach of contractual warranty. The company by manufacturing and selling toys was promising in a way that the toys were fit for consumption by people. The company had broken this promise by selling toys which contained harmful chemicals. The court would make the company pay damages for breaking this contract.

There have been certain cases where the directors of companies have been held personally responsible for negligence. Marty the director of Child Toys Pty Ltd can be held personally responsible if the individual is found by the Australian court of law to have been personally involved in the inclusion of harmful chemicals in the toys manufactured by the company. The court would see if Marty personally took decisions and directed using harmful chemicals made in the production of toys. In a legal case in English court Williams V Natural Life Health Food Ltd 1997 1 BCLC 131 Page 111 the director was personally held liable. While in another case Trevor Ivory Ltd V Anderson [1992] 2 NZLR 517 (page 109) the director was not held personally liable for the negligence of the company (Epublications.bond.edu.au, 2016).    

Liability of Shareholders and Directors

Child Toys Pty Ltd can apply in the Australian courts to procure an injunction restraining Charles from competing against the company. There exists an employment contract between Charles and Child Toys Pty Ltd according to which former cannot do a business competing against the latter before the end of a period of two years after leaving the company. But Charles has broken this contract. The Australian law provides that an ex employee of a company can be restrained from competing against the company the person has left if certain conditions are met. The example of the existence of a non competition clause can  be found in the legal case Write V Gasweld (1991) 22 NSWLR 317 (Foulsham And Gedders , 2016).  If there exists a term in the employment contract between the company and the employee that there is a restriction on the ex employee competing against the company and that restriction is for the purpose of safeguarding a critical interest of the company like preserving some confidential information or goodwill of the company, then the court would restrain the employee. Further the restriction imposed on the employee in the employment contract should be for a reasonable period needed for the protection of company’s interest. Moreover the restriction should apply to only a specific limited geographical area.

An injunction to restrain an ex employee of a company was granted in following two legal cases. Firstly in Lumley V Wagner case in England (1852) 1 De GM & G 604, 42 ER 687 (‘Lumley’). Secondly in case Curro V Beyond Productions Pty Ltd (1993) 30 NSWLR 337, 346- (Curro) which followed the Lumley case. The Lumley case has become a source of guidance for judgements in many legal cases in Australia (Riley, 2012).

References

Allens.com.au (2016) A Long And Winding Road: Putting Companies Into Liquidation. Available at: https://www.allens.com.au/pubs/pdf/insol/pap1aug07.pdf

Australian Securities And Investments Commission (2016) Your Business Structure. Available at: https://asic.gov.au/for-business/your-business/your-business-structure/  (Accessed: 9 September 2016).

Claytonutz.com (2016) Product Liability. Available at: https://www.claytonutz.com/ArticleDocuments/501/16_ProductLiability.pdf.aspx?Embed=Y (Accessed: 10 September 2016).

Companydirectors.com (2016) Private Companies. Available at: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions (Accessed: 9 September 2016).

Companylawclub.co.uk (2016) What Is The Difference Between Shareholders And Directors? Available at : https://www.companylawclub.co.uk/what-is-the-difference-between-shareholders-and-directors (Accessed: 9 September 2016).

Epublications.bond.edu.au (2016) Personal Liability Of Directors For Corporate Torts. Available at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1125&context=blr

Faunce, T. (2010) The Vioxx Pharmaceutical Scandal: Peterson v. Merke Sharpe & Dohme (Aust) Pty Ltd ,  Journal of Law and Medicine, (18), pp. 38-49,  Available at : https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1680120 (Accessed: 10 September 2016).

Foulsham And Gedders (2016) Non Compete And Restraint Of Trade Clauses In Employment Contracts. Available at: https://www.fglaw.com.au/non-compete-employment/ (Accessed: 10 September 2016).

Holdingredlich.com.au (2016) Oppressed Minority Shareholders And Appropriate Relief-Is Winding Up A Solvent Company An Extreme Step? Available at: https://www.holdingredlich.com.au/dispute-resolution-litigation/oppressed-minority-shareholders-and-appropriate-relief-is-winding-up-a-solvent-company-an-extreme-step

Law.unimelb.edu.au (2016) Piercing The Corporate Veil In Australia. Available at: https://law.unimelb.edu.au/__data/assets/pdf_file/0008/1710089/122-Piercing_the_Corporate_Veil1.pdf

Legal.thomsonreuters.com.au (2016) Product Liability. Available at :https://legal.thomsonreuters.com.au/product/AU/files/720502336/chapter_23.pdf (pages 137, 142,143) (Accessed: 10 September 2016).

Malbon, J. (2013) Taking Fake Online Consumer Reviews Seriously, Journal of Consumer Policy, 36(2), pp. 139-157, Available at: https://link.springer.com/article/10.1007/s10603-012-9216-7 (Accessed: 10 September 2016).

Riley, J. (2012) Sterlising Talent : A Critical Assessment of Injuctions Enforcing Negative Covenants, Henonline Sydney L. Rev. , 34, pp. 617, Available at: https://heinonline.org/HOL/LandingPage?handle=hein.journals/sydney34&div=37&id=&page= (Accessed: 10 September 2016).